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What's Wrong With Selling Used C Ds?

July 25, 1993

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WHAT'S WRONG WITH SELLING USED CDs?

Psst. Wanna buy a used CD?

The compact disk, which launched a music revolution a decade ago, has one big advantage over the old LP: It lasts almost forever. Great for consumers, a worry for record companies. Indeed, that crucial feature has triggered an inevitable confrontation, pitting the giant record companies against their retail outlets.

The battle was joined earlier this year when Wherehouse Entertainment Inc., a 339-store retailer based in Torrance, Calif., started selling used CDs side-by-side with new releases--at about half the price. The move by the nation's fourth-largest music chain brought on the wrath of the industry: The distribution arms of Sony, Warner Music, Capitol-EMI, and MCA all have halted their cooperative advertising payments to any retailer selling used CDs. In retaliation, Wherehouse now plans to sue to recoup the ad money.

The four companies, which represent three-quarters of the recording industry, claim that while it is legal to resell a copyrighted product, it cuts into sales of new CDs, diminishes their value, and deprives artists of royalties. "We can't do anything to stop them, but we don't have to support them with advertising for a product we didn't sell them," says Paul R. Smith, president of Sony Music Distribution. The point was underscored last month, when Garth Brooks, last year's best-selling artist, announced he would not release his CDs to stores selling used disks.

So far, used CDs have not been a threat to the record companies. Most analysts figure sales of used disks make up less than 1% of the $9 billion U.S. record industry. Meanwhile, sales of new CDs last year climbed 22%, to $5.3 billion (chart). But with one big retailer getting into the business, record producers are clearly worried that others will follow, if only to remain competitive.

HAPPY RETURNS. Wherehouse has long been regarded as one of the industry's innovators. It was one of the first record chains to embrace video rentals and sales in the 1980s. And two years ago, concerned that ever-higher CD prices were turning off buyers, it established a satisfaction-guaranteed policy unheard-of in the industry: Any consumer could return any CD for any reason.

That probably triggered the current flap. Partly as a result of Wherehouse's returns policy, Sony Music Entertainment eliminated all opened returns, giving retailers a 1% credit instead on all CDs purchased. Unable to return opened CDs to Sony, Wherehouse marked them down and put them on sale. "Lo and behold, the customer loved it," says Bruce Jesse, the chain's marketing vice-president.

The fight escalated. Wherehouse started testing full used-CD racks in nine of its stores, and the industry retaliated by announcing the restrictive co-op ad policies. Those policies accelerated Wherehouse's move into used CDs: "The new policies put us at a competitive disadvantage," Jesse says. "We have to find out fairly quickly how much business we can do."

It's a battle the big record companies aren't likely to win. Small stores and chains have been selling used CDs and, before CDs, used vinyl records for years without recriminations from their suppliers. "It's like trying to legislate goodness," says Don Rosenberg, president of Record Exchange of Roanoke Inc., a 14-store chain based in Charlotte, N.C., that has carried a mix of new and used products since it was founded 13 years ago. "When you have a durable product with a life beyond the first user, there's going to be a secondary market somewhere," he says.

"NOT COOL." Retailers say that the major record labels should clean their own backyards. Much of their inventory of used CDs comes from record clubs owned by Sony, Warner, and BMG, or from free promotions. "If they're worried about the consumer's perception of the value of their CDs, they should stop selling them through record clubs at eight for a penny," says John Carnahan, president of Northern Lights Music Inc., a Minnesota chain.

The industry can hardly afford to threaten the small, offbeat outlets that whip up interest in new acts. Take the band His Name is Alive from Livonia, Mich. The band's label, 4AD Records Inc., is distributed in the U.S. by Warner, so it had to yank ads it had already booked with San Francisco's Rough Trade Records and run a promotion with giant Tower Records instead. "Not nearly as cool," says Bev Chin, 4AD's director of alternative marketing. And, she says, when the final tally came in, not nearly as effective, either.Larry Armstrong in Los Angeles